The oversupply of housing is affecting distressed homeowners in a multitude of ways. For many who can’t keep up with their mortgage payments, they are in an “underwater” situation – the sale price of the home would be less than the amount owed. To walk away from their home, they still would owe the bank money. Further, the neighborhood overall sees a drop in their prices with each foreclosure, and the problem multiplies with other people living nearby.

It benefits everyone if a foreclosure can be stopped. Especially the banks, the lenders. They stand to lose about $50,000 per foreclosure in legal fees and the business of owning and reselling the property.

This is why banks are willing to cut better deals with homeowners who otherwise face a loan foreclosure. The bank is willing to settle for less money that is still better than that $50,000 loss they would experience. But most homeowners do not understand how to go about a loan modification – it gets little attention in the media, so most people don’t even know about them.

Enter the loan modification professionals. These are lawyers and home finance people who know the industry very well. They can efficiently examine a case, look at it in comparison to the bank’s position, then negotiate the solution to the homeowner’s favor. Reputable loan modification companies will charge a fee of around a month’s mortgage payment, and provide a money back guaranty if they are not successful.

It’s a solution to the housing crisis for millions of homeowner, their neighbors and their banks.

A relatively new phenomenon in the home loan foreclosure crisis is the trending toward loan modifications. Not exactly a refinance, loan modifications are when the bank determines they will work with a mortgage holder in distress (usually, in foreclosure proceedings) to find payment terms that are more manageable to the borrower.

The reasons for the borrower being in distress can be many: ARM adjustment that goes beyond the borrower’s repayment potential, loss or drop in income, illness or divorce are among them. What the bank would prefer to do – as does any neighborhood in the vicinity of the property in foreclosure – is stop the foreclosure. A bank stands to lose as much as $50,000 on average when a homeowner loses their house. Why? Legal fees, staff time spent on property management and reselling the property in a depressed market all add up to costs to the bank. They’d rather keep the customer paying for years into the future. The neighbors don’t want a foreclosed property either because it devalues their home values too.

Home loan modifiers, third party intermediaries, can smooth the process for the homeowner and get them a better deal. They work on a one-time fee basis, generally a month’s home mortgage payment, to review documents and then approach the loan officer with an offer. They have industry insider information that enables them to project with good confidence (90 percent accuracy) if a bank will deal, and at approximately what amount. If the modifier is unsuccessful, that fee should be refunded.

All in all, it’s a win-win-win for homeowners, lenders and neighborhoods.

Banks are more willing to negotiate with homeowners on mortgage terms than most people realize.

This is because a bank will lose about $50,000 in a home loan foreclosure. These costs are from staff time involved, lost income in the foreclosure and resale process, management of a foreclosed-upon property, and the ultimate sale of a property for less than the original loan due to the poor market. Banks do not want to foreclose upon properties — it’s a lose-lose scenario.

They are willing to negotiate, but most bank loan officers are overworked, with about 700 cases to manage. They are far more inclined to deal with professionals, in this case loan modification specialists. Loan modifiers are lawyers and finance people who know the industry, understand how to speak the lender’s language and what numbers (recast mortgage terms) are going to be tolerable on the bank’s balance sheets.

What does the homeowner have to do? The homeowner shares financial data with the loan modifiers, at which point the loan modifiers can say whether or not the loan modification will be successful (with about 90 percent confidence). The borrower then pays a one-time fee, about a month’s mortgage payment, which should be refunded by the firm if they fail to find a manageable new mortgage.

This is an untold win-win in the economy and banking system. More people should pursue it to their advantage.

The picture of a distressed mortgage, perhaps due to a bad ARM (adjustable rate mortgage) or loss of income or other factors, is that of a home and family out of control. This is unfortunate, because in fact even a home in foreclosure proceedings is something the homeowner can wrest back to control if they understand the position of the bank.

Banks don’t want to foreclose on properties. It’s bad on their balance sheets and affects the overall value of the bank. It costs them legal fees and staff time to go through foreclosure. And, once foreclosed upon, a property becomes more liability than asset to the bank. They have to manage it physically, and they have to resell it. In the current real estate market, that is a dim proposition.

A homeowner feeling out of control may not know this, and is far less likely to approach the big bad lender about working out a deal. But if the homeowner knows the cost/loss situation on the bank side, that homeowner might be able to negotiate better terms. Yes, a loan in foreclosure can still be recast. For example, back due amounts can be rolled into the principle and the interest rate can be lowered. The bank wins by keeping a customer, continuing to receive monthly payments (albeit, lower), and no property to sell. The homeowner wins by keeping the home at a lower monthly rate.

Home loan modification firms are a smart way for a homeowner to pursue this option. Emotionally detached from the situation, the lawyers and financial experts in loan modification companies know the industry numbers such that they can project in advance the likelihood of a better set of terms for the borrower. A homeowner only needs to pay a one time fee - usually, about one month’s mortgage payment - to the loan modifier. And if the loan modification firm is unsuccessful, they should refund that amount in full.

Control is very important to anyone in financial distress. This is one route that is a lot cheaper than therapy for reducing stress, and, it keeps the homeowner a homeowner.

There’s a new wind blowing in the economy. No one is calling the recession over yet, by any stretch of the imagination. But as vulture funds buy up “toxic” bank assets – showing that there is value in everything once everyone agrees to a price – homeowners themselves are learning to take control of their situation and their homes.

The tool emerging for homeowners in distressed mortgage situations is loan modifications. These are not loan refinancings, although they are similar. Few people in distressed situations, with loss of income or illness or divorce challenging their credit rating, are eligible for refinancing. But if the homeowner can prove some ability to pay monthly on a mortgage at a reduced rate, the bank will consider a recast of the mortgage terms.

That’s right, banks will negotiate. The problem is most homeowners don’t have the savvy to negotiate better terms on their own, if they know the option even exists. They don’t know how low a mortgage lender is willing to go to keep a customer and avoid taking possession of a home (banks don’t like owning residential property – it’s not what they are good at and they usually lose money in the process).

Enter the loan modification consultants, specialists in real estate law and lending. For an affordable fee, about one month’s mortgage payment, the loan modifiers will approach the lender with industry knowledge of what deal will work for both the borrower and the lender. Loan modification companies that know their stuff will not take a case without 90 percent certainty they will succeed in the effort. And if they fail, they should return 100% of the borrower’s fee. This makes it a no-lose proposition for the homeowner.

It’s not like it’s 2005 all over again. But it’s one of several hopeful signs that there are solutions in this economic crisis. The homeowner needs to take action by finding a loan modification specialist to do the work for them.